1 Stock to Buy, 1 Stock to Short in Chinese Tech

CYOU and QIHU offer opportunity whether you're bullish or bearish in this space

All day I scan the charts looking for technical patterns to trade. My Trending 123 Pattern Scan powered by Recognia is one useful tool I have to scan the markets quickly, and it is showing two polar opposite technical events in the intermediate term for these two tech stocks.

Buy the Bullish Symmetrical Continuation Triangle

Changyou.com (NASDAQ:CYOU) is an online game developer in China with a symmetrical continuation triangle that has developed over the past 16 days.
Click to Enlarge A symmetrical triangle shows two converging trendlines, one is ascending, one descending, creating a sideways symmetrical triangle. The formation occurs because prices are making both lower highs and higher lows. Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors, notes that the pattern should display two highs and two lows, all touching the trendline.

This traditional volume pattern develops because of investor sentiment during the creation of a triangle. Investors are uncertain. This uncertainty means that they are buying and selling sooner, which translates into a narrowing of the highs and lows, creating the “coil” shape, indicative of the triangle . Because investors are uncertain, many are holding on to their stocks, awaiting the market’s next move. When breakout finally does occur, there’s a surge in market activity because investors are finally certain enough about the direction of the market to release their pent-up supply or demand.

A symmetrical continuation triangle can be a sign of a reversal or of a continued channel. An ascending triangle like this one is considered bullish. Traders are advised to wait a few days after the stock shows a breakout to make sure it will continue.

Recommendation: Go long CYOU. Yesterday the stock closed at $30.69, and my scanner has identified a target price range between $35.50 – $36.75.

Short the Diamond Top

Qihoo 360 Technology (NYSE:QIHU) is a company that provides antivirus software in China, and it has a diamond top pattern that has developed over the past 36 days.

Click to EnlargeA Diamond Top is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend.

The Diamond Top pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The trading opportunity occurs when prices break downward out of the diamond formation.

The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move.

Recommendation: Short QIHU. The stock closed at $30.52 yesterday, and my scanner has identified a target price range between $24.75 – $25.75.

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